Australia and NZ- Weekly Prospects 16/02/09

Australia and New Zealand - Weekly Prospects

• There were two main surprises in the data released in Australia last week. First, the consumer confidence index showed an alarming slump in February, even though the survey was conducted after the RBA's decision to cut the cash rate 100bp and the government's huge fiscal stimulus announcement. Second, employment rose in January, albeit mildly - the forecast was for a large decline. The 0.3% point rise in the unemployment rate, though, was in line with our expectation. This week, RBA communications are the main focus. The minutes from the RBA's February Board meeting are released Tuesday, and probably will explain in detail the reasons behind the decision to cut the cash rate so aggressively - the profound weakness offshore will be the main focus. Also, the RBA Governor testifies to Parliament on Friday - this should be the highlight of the week.

• In New Zealand, retail sales values slumped in December, driven by a fall in automotive fuel retailing. Consumers have become increasingly reluctant to spend amid widespread recession fears, still-elevated market interest rates, falling asset prices, and heightened anxiety about job security. Retail sales volumes fell more than expected, with the weaker than expected result prompting a further downgrade to our 4Q GDP growth forecast from -0.5%q/q to a deeper contraction of 0.7%; this will mark four straight quarters of falling GDP. We expect household spending will fall 0.5% this year, with only the forthcoming tax cuts in April and lower interest rates preventing an even larger decline than currently forecast.

• In tracking the path of the global credit crisis since August 2007, it is important to distinguish between bank and nonbank activity. A concentration of the credit tightening over the first year of the credit crisis resulted from the seizing up of securitized sources of funding that had grown dramatically over the previous two decades. Banks, for their part, tightened credit standards, but continued to increase lending. As a result, banks served as an important stabilizer over the first year of the crisis, moderating the drag on overall activity. The role of banks in the crisis is now changing. The onset of a severe recession is weakening bank balance sheets and prompting a further tightening in credit conditions. In addition, it has become unusually difficult for banks to raise private capital, increasing institutional caution. As a result, bank lending has flattened, a pattern seen regularly following the onset of past economic downturns.

• Global consumer spending appears to have increased in January, building on a tentative firming that took hold into year end. Spending was supported by the purchasing power lift from lower energy and food prices, which offset the drags from falling net worth and decelerating labour income. The back to back gains in global vehicle sales in December and January are the most broad-based sign of improvement. These gains followed a 20% decline over the previous five months. To this, add the strong advance in January US retail sales and the apparently solid gains in the UK and China. All told, we estimate that our index of global retail sales rose 0.5%m/m in January, its second increase in the past three months.

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